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Tesco shares: will it be more good news from Dave Lewis?

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Tesco has been busy this year, what with the acquisition of Booker for a £4 billion cash and stock deal which closed in March and the launch of its new Jack’s discount chain. The supermarket continues to struggle against the rise of the discount chains as well as online options for British shoppers. Then we have the merger of Sainsbury and Asda, and the consequences for that.

With all this activity, Tesco shares are still up 15% this year, which means it is doing better than the FTSE 100 index, which has given up 2% since the beginning of the year. At one stage Tesco shares were trading at levels not seen since March 2015, as investors bought into Booker as well as the turnaround story posited by Dave Lewis and his team. The Tesco interim results will be the best chance investors in Tesco shares have to assess Lewis’ progress.

Tesco shares: interim results due on Wednesday

Tesco reports interim results on Wednesday. Analysts will be looking closely at like for like sales growth in the first half as sales for Tesco have grown in its vital UK market for 10 consecutive quarters. In Q1 alone Tesco UK sales were up 2.1% on a like-for-like basis while group sales were up 1.8% year on year. Booker reported growth of 14.3%.

For the full year, analysts will be looking for a pre-tax profit of £1.76 billion for Tesco, up from £1.14 billion last year. In the first half of last year, Tesco made £562 million on a stated basis and £504 million excluding exceptional capital gains. Tesco also returned to the dividend list last year, after a two year break. It paid an interim dividend of 1p and a final payment of 2p. Analysts say they are looking for an increase in the dividend from 3p to 5.5p.

Tesco shares have been trading in a predictable range ahead of this week’s results, between 240-250 last month as the market sat on its hands and waited to see what will happen. Tesco shares are not far off their 52 week high of 266.8. It currently has a PE ratio of 19.85.

“On a more strategic basis, before the Booker deal Dave Lewis had been targeting a 3.5% to 4.0% operating margin target for 2019-20, up from 2.3% in 2016-17,” observes Russ Mould, investment director with AJ Bell. “When the Booker deal was first announced in January 2017, Tesco targeted £200 million of cost benefits, on an annual run-rate basis, within three years and a further £25 million in revenue synergies.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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